Disciplining China’s Trade Practices at the WTO: How WTO Complaints Can Help Make China More Market-Oriented

The Trump administration has argued that the World Trade
Organization (WTO) has failed to address China’s “unfair”
trade practices. While it is true that China’s economic rise poses
a unique challenge to the world trading system, WTO dispute
settlement has more potential to address China’s practices than the
administration believes. If the Trump administration really does
want the Chinese economy to be more market-oriented, it should make
better use of WTO rules by filing more complaints against China.
While it is often accused of flouting the rules, China does a
reasonably good job of complying with WTO complaints brought
against it.

There are a number of policy areas where additional complaints
are possible. The U.S. Trade Representative’s Office (USTR) has
been gathering detailed information on China’s practices for years
and should file complaints on this basis, coordinating these
efforts with key allies. And for those areas that are not well
covered by WTO rules, such as state-owned enterprises, the United
States should work with these allies to develop new rules. So far,
the Trump administration has mainly relied on unilateral tariffs to
open the Chinese market, but these are likely to hurt Americans,
while not having much effect on Chinese trade practices. The
multilateral route is a better approach to disciplining these trade
practices and making China more market-oriented.

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Introduction

There is a growing bipartisan sentiment in Washington that
Chinese trade practices are a problem, since these practices are
unfair to American companies in a number of ways. But there is
disagreement about the appropriate response. Can multilateral
institutions be of use here? Or is unilateralism the only way?

The Trump administration believes that the international dispute
settlement system of the World Trade Organization (WTO) offers no
effective remedy for these practices, and prefers an approach that
relies mostly on unilateral tariffs. The administration sees the
issue as follows. China’s mercantilist state systematically
discriminates against foreign products and foreign producers in
China while forcing foreign companies to hand over their
intellectual property (IP) as the price of access to China’s
large and growing market. China engages in widespread cheating in
its trade practices, including not only high tariffs, domestic
content requirements, and other traditional forms of protectionism,
but also rigged regulations that erect trade barriers by favoring
Chinese companies and outright theft of foreign IP. And, Trump and
his trade cohorts say repeatedly, there is virtually nothing the
United States can do under current WTO rules to stop this predatory
Chinese behavior.

Leading administration officials have referred to the
WTO’s “abject failure to address emerging problems
caused by unfair practices from countries like
China”1 and its “inability to
resolve disputes, limit subsidies or draw China into the market
status that was envisioned when China joined the
WTO”2; and they have declared that the
WTO “is not equipped to deal with [the China]
problem.”3 Since Trump became president, the
United States has pursued only one new WTO complaint against China
(although it has continued to litigate some cases brought by the
Obama administration). According to the U.S. Trade
Representative’s Office (USTR), in a report issued in January
of 2018, “The notion that our problems with China can be
solved by bringing more cases at the WTO alone is naïve at best,
and at its worst distracts policymakers from facing the gravity of
the challenge presented by China’s non-market
policies.”4 A recent report by the USTR has
gone so far as to call China’s entry into the WTO in 2001
under the terms adopted at that time a mistake.5

Even some scholars with no allegiance to Trump have their doubts
about the sufficiency of WTO rules and the capacity of the WTO as
an international institution to confront the unique challenge of an
economy like that of 21st-century China. Harvard Law professor and
former USTR official Mark Wu has written that “the WTO is
struggling to adjust to a rising China” because of
“China’s distinctive economic structure.” He
notes, “The WTO dispute settlement system has effectively
resolved certain disputes and will continue to do so,” but
“the system has its limits.”6 He
adds, “Overall, I contend that without major change
China’s rise, should it continue, will contribute to a
gradual weakening of the WTO legal order.”7

While it is true that China’s rise poses a unique
challenge to the WTO-based world trading system, and there are
limits to what can be done to counter China’s mercantilist
and protectionist practices under existing WTO rules through
dispute settlement, this paper makes the case that WTO dispute
settlement has considerably more potential than the Trump
administration thinks, and it offers, over the long term, a far
more effective means of responding to protectionist Chinese trade
policies than the current Trump policy of applying illegal
unilateral tariffs on billions of dollars’ worth of Chinese
products entering the U.S. market—and threatening hundreds of
billions more. While WTO complaints alone cannot solve all of
America’s commercial problems related to China, they can be a
crucial part of the ongoing effort to encourage China to see that
the best way for it to rise is not by the mercantilism and
protectionism of state-managed trade but, instead, by becoming a
market-oriented, rule-following, fully developed nation.

Supporting China’s membership in the WTO in 2001 was not a
mistake by the United States. All 163 other members of the WTO,
including the United States, are much better off because China is
inside the rules-based global trading system and has not been left
outside it. China has made great strides since 2001 toward full
compliance with the rules of the WTO trading system.

And yet, even greater strides remain to be made. Today, China
faces a choice: Will it continue to move toward free markets, or
will it entrust the future of the Chinese people to an economic
philosophy extolling state-devised and state-driven economic
decisionmaking that limits foreign competition and tips the scales
against foreign producers and their products? As China confronts
this choice, WTO rules and disciplines offer one opportunity, and a
much better one than some believe, for showing China the merits of
making the right choice of a much freer market economy.

This paper proceeds as follows. First, it explains that while
some of China’s specific practices may be a problem, its
desire for economic development is natural and appropriate.
Whatever polices are adopted with respect to Chinese trade should
not try to limit China’s economic ambitions.

Second, it argues that for those practices that are
protectionist or otherwise problematic, international trade rules
should be utilized to steer China in a market-oriented direction.
Despite any skepticism about China’s willingness to play by
the rules, reviewing the cases brought against China makes clear
that China’s track record in WTO compliance is actually quite
good.

This paper then argues that the problems the United States and
others have with China are just as much about the failure to
utilize existing WTO rules as they are about China’s bad
behavior. Uncovering China’s WTO violations is challenging
but it can be done, and many potential complaints have been
overlooked, in particular in relation to intellectual property
protection, forced technology transfer, and subsidies. The paper
explains these issues briefly in the main body, and then in more
detail in Appendix 2.

The paper also cautions against condemning China for actions
that are similar to what others do or are not as nefarious as they
are portrayed. The case against China is weakened by hyperbole and
exaggeration.

Finally, this paper considers gaps in existing rules and calls
for an expansion into several new areas.

It will doubtless be insisted by those busy imposing unilateral
tariffs that bringing WTO legal claims will require too much time
and too much trouble and that, even if the United States prevails,
a remedy is at best several years away. While there is some truth
here, the current trade war will also require time and trouble and
impose considerable economic costs on the United States as China
retaliates, and then the United States ups its sanctions, and China
responds again, and so on. What other untold and untoward
consequences will there be from an abandonment by the United States
of reliance on multilateral WTO remedies and thus of the
international rule of law? Would not U.S. trade interests be better
advanced by taking the time instead to seek and implement a binding
and enforceable WTO judgment backed by the lawful threat of
significant economic sanctions?

Despite the repetitions of the Trump administration insisting
otherwise, the WTO remains the best hope for disciplining
China’s errant trade practices. Rather than abandon the WTO
in its trade relations with China, the United States should rely on
the WTO more than it has so far. Ideally, in cooperation with other
major trading countries, the United States should take action
within the WTO to ensure that China complies with its WTO
obligations, and in this way push China to fulfill its promise of a
transition to a market economy.

In Defense of China’s Economic Ambitions

In recent years, there has been growing concern in the United
States and elsewhere about China’s lofty economic ambitions.
Through its “Made in China 2025” industrial policy,
China, it is said, has set out clear goals for its eventual
expansion into, and domination of, many advanced high-tech
industries, such as robotics, advanced information technology,
aviation, and new-energy vehicles.8
There is widespread, increasing, and legitimate concern in the
United States that Americans will suffer as a result, as our own
industries are harmed by unfair Chinese competition, and as
Americans have to rely more and more on China for products, with a
potential risk to our national security. Beyond this, the current
American conventional wisdom seems to suggest that China’s
economic rise may contribute to the decline of the United
States.

In reality, the fear that China’s rise will lead
inevitably to America’s fall is overblown. Competition in the
world economy is not a zero-sum game. The economic success of other
countries does not lead to our economic failure. The United States
has been through this before, with the industrialization of Japan
and other countries in the decades following World War II. Not only
have we lived to tell the tale, but we are actually better off as a
result. As other countries have risen, Americans have prospered
alongside them. Without a doubt, China poses challenges different
from those confronted earlier. Yet, despite these unique
challenges, with the right combination of U.S. policies and Chinese
responses, China’s continued economic development can have
the same benefits as earlier examples of development.

There is also this: It is far better for America that China
should rise than that it not rise. The economic failure of
China would reveal to both countries and to all the world the
fact—apparently little understood by the current president of
the United States—that the Chinese economy and the American
economy are linked together and are in many ways
interdependent.

And China has every right to rise. It is not forever fated to be
a low-wage assembly line for the rest of the world. Like every
other country, it has the right to climb the ladder of comparative
advantage in pursuit of more value-added growth in an expanding
global economy. While there are certainly reasons to be concerned
about a great many aspects of China’s current statist
approach to advancing its industries, there is nothing inherently
wrong with China’s moving up the economic ladder.
Furthermore, the United States benefits if the Chinese people
prosper. The Chinese people and the American people alike will
prosper most if both China and America are part of an open and
rules-based global economy.

Just as we Americans are better off with the rise of Japanese
car makers, we are better off with additional competition from
Chinese companies in numerous sectors. If China begins to compete
in high-tech goods, that will be disruptive to certain Americans,
just as it was when foreign companies began competing with us in
textiles and clothing, furniture, and other low-skill manufacturing
sectors. But no matter how much some people may lament the decline
of particular industries, few would suggest the American economy
was better off in the past or would be better off without the
innovation-inspiring benefit of that foreign competition. We could
have an economy where Americans were sheltered from competition,
but why would we want to? The lower-quality, more expensive
products for consumers and the less innovative and thus less
competitive sheltered industries that would be the result would not
be worth the tradeoff. Furthermore, wealthier foreign customers are
also in the United States’ interest. Japan, China, and others
can now buy a lot more American goods and services than they could
in the past. That is of great benefit to American workers and
businesses.

A crucial point to recall is that China is industrializing at a
time when others have already paved the way. Countries develop at
uneven rates, the reasons for which are complex. For those that
develop later, it is natural to look at what others have done
before. It does not make sense for China to reinvent the wheel, or
the automobile. To some extent, China can and should copy what
others have done. As an example, it recently began developing a
wine industry, with input from experts from Europe.9 If
knowledge and expertise already exist, China and other latecomers
should use it, whether the product is wine or semiconductors.

From the standpoint of the consumer, the additional competition
is of great benefit. What is needed is to find the right balance
between the spread of knowledge and the protection of intellectual
property rights. WTO Members have tried to strike this balance
under the Agreement on Trade-Related Aspects of Intellectual
Property Rights (TRIPS Agreement). Intellectual property protection
is, in a strict sense, an exception to free trade in that it limits
free trade in ideas. However, this exception is thought to be
justified by the need to provide incentives for the innovations
that are often the products of new ideas.

At the same time, some behavior related to economic catch-up can
be highly problematic. For example, where governments or
corporations steal trade secrets from foreign competitors—as
has been alleged with China—or where governments engage in
classic forms of protectionism by imposing tariffs and by granting
subsidies in violation of agreed-on global rules, such behavior is
not acceptable. We do not want companies hacking into
competitors’ networks, and protectionism undermines rather
than promotes competition.

On the other hand, companies should be free to buy a
competitor’s product and take it apart to see how it works.
They should be able to hire people away from their competitors,
even in foreign nations. They should even be able to buy their
foreign competitors, a routine practice for which Chinese companies
have been criticized. These are normal ways companies compete, and
just as it is acceptable when American companies do these things,
it should be acceptable when Chinese companies do the same.

International trade rules should push development toward this
sort of productive competition and should discourage harmful
practices. In essence, the rules should allow Chinese companies to
look to foreign innovations as inspiration but force them to stay
within mutually agreed-on legal boundaries of governmental and
business behavior.

That is precisely what existing trade rules do. With regard to
products, WTO rules prohibit discriminatory taxes and regulations,
as well as product regulations that are overly trade-restrictive,
food safety regulations that are not based on science, and certain
kinds of subsidies. There are also detailed provisions on
intellectual property protection and enforcement. Critics of WTO
dispute settlement as a solution to problems with China
underestimate how much its rules can help with China’s
practices.

Part of the problem right now may be the limited number of
enforcement actions taken against China. There have been some WTO
complaints, but a wide range of Chinese practices that are
supposedly of concern have not been challenged at the WTO. The
lesson China might be drawing is that if its practices are not
challenged it is because the rest of the world tacitly accepts
them. Hence there is a compelling need to challenge Chinese actions
when they are unfair to foreign products and foreign competitors in
the Chinese marketplace and beyond.

The focus of this debate right now is China, but it will not end
there. Development in other countries is in progress or is coming
soon—Vietnam, India, and many African countries, to name just
a few. As with China, it is good for Americans if these countries
grow wealthier, but we are right to insist that they grow in ways
that are consistent with agreed-on international rules and with
fundamental fairness.

The controversy over China’s rise tells us that we must
handle this development process appropriately. China’s rise
has been dominated by rhetoric that exaggerates the problem and
misunderstands the rules of the trading system. The trade rules
that do exist can be useful, but they are not self-enforcing. They
must be invoked by governments.

China’s 2025 plan is ambitious. It wants to be
“globally competitive” and a “leader” in
all of these high-tech industries. For the most part, this should
not cause concern. We are all better off with more competition, and
if China can become competitive in advanced technology sectors and
lead the way on innovation, we all benefit.

The rhetoric China uses is interesting, but the more important
issue is its actual trade practices. If Chinese companies compete
with hard work and ingenuity, we should celebrate their success.
But if China discriminates against foreign companies, or offers
subsidies to its own companies or favors them in other ways, other
governments should challenge those practices at the WTO. And if
there are questionable practices not covered by the rules, other
governments should coordinate an effort to get China to agree to
new rules.

Yes, China has every right to rise, but every other member of
the WTO has the right to insist that China must rise within the
bounds of the global trade rules to which it has agreed. And where
rules do not yet exist, we must find ways to negotiate and agree on
them. The message we send China should be clear: we want you to
continue to rise, but you must follow the same rules as other WTO
Members, and you must work with us and with all other WTO Members
to establish the additional rules that we need.

China’s Respectable Compliance Record in WTO
Disputes

One of the reasons for the skepticism that exists about using
WTO rules to challenge China’s trade practices is the idea
that China “cheats” and therefore the rules are
worthless. In fact, as this section of the paper demonstrates,
China has a relatively strong record of compliance in the
complaints that have been brought against it so far.

China joined the WTO in 2001. The first complaint against it was
brought in 2004, with governments perhaps letting China gain some
experience within the system before challenging it in dispute
settlement. From 2004 to 2018, 41 complaints were brought against
China, on 27 separate issues, or “matters” in
WTO-speak—legal claims of actions inconsistent with WTO
obligations, sometimes with multiple countries complaining about
the same matter, resulting in more complaints than matters.
(Appendix 1 provides details on these complaints and China’s
responses.) During that time, China was second only to the United
States in the number of complaints it faced.

Of the 27 matters litigated against China, 5 are still pending,
12 were litigated all the way through, and 10 were resolved through
some kind of settlement, or not pursued after the measure was
modified. These cases addressed a wide range of issues: export
restrictions, subsidies, intellectual property protection,
discriminatory taxes, trading rights, services, and trade
remedies.

In all 22 completed cases, with one exception where a complaint
was not pursued, China’s response was to take some action to
move toward greater market access. This was done either through an
autonomous action by China, a settlement agreement, or in response
to a panel or appellate ruling.

In the cases where there was a WTO ruling, there was sometimes a
dispute about compliance with the ruling (as happens with other
countries as well), and China’s compliance came only after
the follow-up complaint procedure provided for in WTO law (Article
21.5 of the WTO’s Dispute Settlement Understanding). In other
cases, the complainants have disputed whether China has complied
but have not brought an Article 21.5 complaint to push it to
comply.

The overall picture of China’s response to WTO complaints
looks very much like the situation of other governments that face
such challenges: China has made efforts to comply, although some
issues are still contested. The actual extent of Chinese compliance
with WTO judgments has been questioned; in some instances it has
been seen by some as only “paper
compliance.”10 But there are no cases where
China has simply ignored rulings against it, as has happened with
some other governments. For example, the United States has not
complied with the WTO ruling in the cotton subsidies complaint
brought by Brazil, and the European Union (EU) still does not allow
hormone-treated beef to be sold there even after losing a complaint
brought by Canada and the United States.

The lesson here is that bringing WTO complaints against China
works. It does not work perfectly in all cases, but that is no
different from the situation in other countries. As Mark Wu,
despite his reservations about the efficacy of WTO dispute
settlement with respect to China, has acknowledged, thus far the
WTO “has served its purpose effectively as a forum to enforce
China’s trade obligations. On the numerous occasions when the
WTO has ruled against China, the Chinese government has willingly
complied with the judgment and usually altered its laws or
regulations to comply with WTO rules.”11

Uncovering China’s Disguised Protectionism and WTO
Violations

One reason why some question the suitability of WTO dispute
settlement for resolving trade disputes with China is the lack of
transparency in Chinese governance. A recurring refrain from the
United States is the difficulty of discerning what the Chinese
government is doing, either directly or indirectly. When has the
Chinese government taken an action—what in trade law is
called a “measure”—that falls within the scope of
the jurisdiction of the WTO treaty and thus of WTO dispute
settlement? All too often it is difficult to tell, and all too
often the Chinese government makes it more difficult with the
opacity of its administrative regime.

Hence, one reason for the current reluctance of the Trump
administration to pursue WTO remedies instead of simply imposing
punitive tariffs is the sheer labor that often goes into proving
that there is indeed a Chinese measure that can be challenged in
the WTO.

Yet, WTO rules make this task easier than some think, for two
reasons. First, the rules set out a broad scope for the measures
that can be challenged. The concept of measures is not limited
solely to statutes and regulations; it also includes “the
acts or omissions of the organs of the state, including those of
the executive branch.”12
This standard covers a wide range of Chinese national and local
government behavior, as well as governmental behavior that is
intermingled with that of Chinese state-owned enterprises and the
still-growing Chinese private sector.

Second, WTO rules contain numerous reporting requirements, under
which the Chinese government must disclose its policies. If it does
so, the United States will have the information it needs to bring
the complaints. If it does not, China will be in violation of these
reporting requirements.

In addition, the USTR has been gathering evidence of
questionable Chinese trade practices for years, and the Section 301
report presents a substantial amount of it. There may be a few
issues where more evidence would be useful, but there is no
shortage of detail on how the Chinese government has behaved. The
task now is to take that evidence and turn it into WTO
complaints.

Start Bringing the WTO Complaints

Four promising areas of WTO complaints against China are general
intellectual property protection and enforcement; trade secrets
protection; forced technology transfer; and subsidies. This section
provides a brief overview of each, with additional details on
possible legal claims included in Appendix 2.

Quite rightly, President Trump and his administration are, in
their unfolding trade strategy, targeting Chinese transgressions
against U.S. intellectual property rights. Intellectual property is
a major engine of the American economy. According to the most
recent numbers from the U.S. Department of Commerce, intellectual
property accounts for 38.2 percent of the U.S. GDP; U.S.
IP-intensive industries provide 27.9 million jobs directly and an
additional 17.6 million jobs indirectly through their supply
chains, and these jobs pay 46 percent more than jobs in
non-IP-intensive industries.13
(By contrast, the U.S. steel industry employs 143,000 workers, and
there are 76,000 workers in the U.S. coal industry.14)

Unquestionably, pervasive intellectual property violations are a
threat to millions of U.S. jobs in critical innovative U.S.
industries. The U.S. International Trade Administration has
estimated that U.S. IP-intensive industries doing business in China
have lost about $48 billion in sales, royalties, and license fees
to various forms of encroachment on their intellectual property
rights. These U.S. firms have spent $4.8 billion to address
possible Chinese IP infringements. An improvement in intellectual
property protection and enforcement in China to levels comparable
to those in the United States would likely translate into 923,000
new jobs in the United States.15
And these most recent numbers are from 2011—before the recent
intensification of China’s mercantilist industrial
strategy.

After 17 years in the WTO, China still falls far short of
fulfilling its WTO obligations to protect copyrights, trademarks,
patents, and other intellectual property rights. Millions of
Chinese live on the illegal gains of widespread counterfeiting of
U.S. and other foreign products. The Chinese, for example, are
“addicted to bootleg software.”16
According to the Business Software Alliance, about 70 percent of
the software used in China, valued at nearly $8.7 billion, is
pirated.17 The annual cost to the U.S.
economy worldwide from pirated software, counterfeit goods, and the
theft of trade secrets “could be as high as $600
billion.”18 China “remains the
world’s principal IP infringer,” accounting, for
example, for 87 percent of the counterfeit goods seized upon entry
into the United States.19

Before taking unilateral action outside the WTO in response to
widespread Chinese IP infringements, the United States should take
a closer look at the substantial rights it enjoys under the
WTO’s TRIPS Agreement for protecting U.S. intellectual
property against theft and other abuses, in particular those
obligations related to the domestic enforcement of these
protections. Potential remedies in the WTO exist and should not be
ignored, and these remedies can be enforced through the pressure of
WTO economic sanctions.

A more specific obligation related to intellectual property is
that American companies have, in effect, been forced to turn over
their technology to Chinese partners—in some cases by
revealing their trade secrets—in exchange for being allowed
to do business in China and have access to the booming Chinese
market. Here, Article 39 of the TRIPS Agreement, which establishes
a WTO obligation for the “Protection of Undisclosed
Information,”20 can help. The United States was
among the leaders in advocating the inclusion of Article 39 in the
TRIPS Agreement, but the United States has, to date, not initiated
an action in WTO dispute settlement claiming a Chinese violation of
this WTO obligation.

Beyond intellectual property, there have been long-standing
though somewhat vague allegations from U.S. industry groups that
China forces foreign companies who wish to operate in China to make
investments through joint ventures, and to then transfer their
technology to their Chinese partners. As they describe it,
transferring technology to Chinese companies is often a condition
for the ability to make an investment there. Specific details of
these arrangements are difficult to uncover. The companies involved
may be reluctant to complain because they fear having their
investment permission revoked by the Chinese government. All the
same, in response to the USTR’s request for comments under
Section 301 regarding China’s trade practices, a wide range
of organizations have identified forced technology transfer as a
concern. There is a specific provision of China’s WTO
Accession Protocol that addresses the issue of forced technology
transfer. The United States should invoke it as the basis of a WTO
complaint.

Finally, one of the most frequently raised concerns about
Chinese trade practices is the Chinese government’s provision
of subsidies to both state-owned enterprises and private companies.
These subsidies are offered through a variety of programs,
including the Made in China 2025 initiative and its specific
implementing measures. Fortunately, the WTO has extensive and
detailed rules on subsidies that can be used to challenge
China’s behavior. WTO Members have brought several complaints
against Chinese subsidies already, including an ongoing case
related to agriculture subsidies (see Appendix 1), and there are
additional complaints still to be brought.

Don’t (Always) Believe the Hype

While there are many justified complaints about China, it is
important to examine each allegation objectively. There is a
tendency these days to demonize China for everything it does, even
when its practices are similar to those of other countries.
Certainly there are some Chinese trade practices that merit
criticism, but the case against China is weakened when unsupported
claims are included.

For instance, some people see China’s antitrust
investigations into the practices of foreign companies as
“predatory regulatory interventions” in the market. The
famous “China Shock” economists David Autor, David
Dorn, and Gordon Hanson have put forward an antitrust case against
Qualcomm from 2015 as an example.21
But was this case really an example of Chinese protectionism?

Qualcomm’s practices in China were covered by the
provision of China’s anti-monopoly law related to
“abuse of a dominant market position.” In early 2015,
after a 14-month-long investigation, China’s National
Development and Reform Commission found that Qualcomm abused its
market dominance in wireless telecommunication technology and three
related baseband chipset markets. Specific violations included
setting unfairly high patent royalties, charging for expired
patents, tying Standard Essential Patents (SEPs) to non-SEPs,
forcing cross-licensing without considering the value, and adding
other unfair terms in licensing agreements.22
In a settlement, Qualcomm agreed to a fine of $975 million.

Was there anything “predatory” about China’s
behavior? When considering this question, keep in mind that
Qualcomm has also been the subject of antitrust investigations in
other countries for similar practices. In 2009, the South Korea
Fair Trade Commission fined Qualcomm $200 million for the abuse of
its dominant position in the chip market.23
That same year, the Japan Fair Trade Commission found that Qualcomm
used its dominance in SEPs to coerce certain Japanese manufacturers
of semiconductor integrated circuits to cross-license for
free.24 And in 2015, the EU started
investigating Qualcomm’s abuse of its dominant position in
the LTE baseband chipset market by providing financial incentives
to its buyers in order to secure an exclusive contract to squeeze
out competitors. As a result, the EU imposed a $1.2 billion
fine.25

In the United States, the Federal Trade Commission (FTC) filed a
complaint in federal court in 2017 charging Qualcomm with violating
U.S. antitrust law. Specifically, the FTC challenged several
Qualcomm practices, including collecting royalties that were beyond
what was fair, reasonable, and nondiscriminatory for its patented
chips, forcing cross-licensing without considering the value of
cross-licensed patents, and using its monopoly in chip supply to
force phone manufacturers to agree to Qualcomm’s preferred
license terms.26 The case is currently pending in
district court.

A second example is the frequent accusation that China is
“stealing” U.S. intellectual property, a constant
refrain in the U.S. media.27
Stealing and theft are strong accusations, and they do not always
accurately describe the situation. In some instances, Chinese
government or private-sector agents hack into U.S. corporate
networks to take confidential business secrets. But other
situations that have been lumped into the “theft”
accusations look much less nefarious.

A recent White House report titled “How China’s
Economic Aggression Threatens the Technologies and Intellectual
Property of the United States and the World” talks about
“state-sponsored IP theft through physical theft,
cyber-enabled espionage and theft, evasion of U.S. export control
laws, and counterfeiting and piracy,” but also identifies
“technology-seeking, state-financed foreign direct
investment” as one form of “economic aggression.”
Along the same lines, the USTR Section 301 report on China’s
unfair practices states, “The Chinese government directs and
unfairly facilitates the systematic investment in, and acquisition
of, U.S. companies and assets by Chinese companies, to obtain
cutting-edge technologies and intellectual property and generate
large-scale technology transfer in industries deemed important by
state industrial plans.”28

Theft and purchasing are, in fact, very different. Theft is an
unacceptable practice that governments should make every effort to
curtail. Company purchases by willing buyers and sellers, by
contrast, are generally positive events, with both sides
benefiting. There may be situations where a sale to a foreign
company raises national security concerns, but there is nothing
inherently wrong with the practice. Also, less advanced economies
trying to learn from their more advanced counterparts is not
exactly new and was advocated by Alexander Hamilton for the United
States.29

The lesson here is that we should not jump to conclusions about
the propriety of government behavior simply because China is the
one doing it. Objectivity is crucial here, and baseless claims can
undermine legitimate efforts to bring reform to China.

Gaps in the Rules

Instead of a China trade policy consisting mostly of
confrontation, the United States should rely more on negotiation.
Unquestionably, the existing WTO rules are not adequate in all
respects to deal with the unique challenges presented by China to
the rules-based trading system. The remedy for the inadequacy of
rules, however, is not abandoning those rules, but the adoption of
more and better rules. The understandable frustrations of the
United States and other WTO Members with the statist, mercantilist,
and clearly protectionist aspects of a great many of China’s
trade policies should not cause us to discard the rules-based
trading system we have endeavored so long to establish as a crucial
part of the liberal international order. Rather, it should cause us
to redouble our efforts to reinvigorate the rules-based trading
system by negotiating new rules to discipline protectionist actions
and encourage China to adopt the market-based approaches that alone
can secure long-term economic success for the Chinese people.

Ideally, these negotiations should be multilateral and should
include China. As things stand now, China seems to see little
benefit to any such negotiations: imposing unilateral and illegal
tariffs on its products will not encourage it to sit down at the
global negotiating table. Instead, China will retaliate with
tit-for-tat tariffs and other trade restrictions of its own. But
engaging China in WTO dispute settlement could—as has
happened in other instances with other countries in the
past—help inspire it to negotiate rather than litigate.
What’s more, the likelihood of achieving this result would be
greatly enhanced if the United States were joined as co-complainant
by the EU, Japan, Canada, and others with similar concerns about
Chinese trade practices. This, of course, would require a U.S.
trade strategy of working in concert with our long-standing allies
on trade instead of alienating them.

If China chooses not to participate in multilateral
negotiations, then it should be given an incentive to do so by
negotiations that proceed without China. The aim here should not be
to “isolate” or to “contain” China, but to
start a negotiating process in which China will eventually enlist
for its own sake economically. These negotiations should be
conducted within the legal framework of the WTO, in part so that
China will have an automatic right to join in new rulemaking if it
wishes to do so and if it agrees to abide by the new rules that are
made.

Something akin to this trade-negotiating approach—albeit
outside the legal framework of the WTO—was employed by the
United States and 11 other Pacific Rim countries in the negotiation
of the Trans-Pacific Partnership (TPP). The idea of the TPP was in
part to set up a common standard of enabling rules for free markets
over and above those already in the WTO treaty and—through
the proven success of such a standard—give the Chinese
government reason to join. Unfortunately, one of the first acts of
the Trump administration was to pull out of the TPP, which has
since been concluded successfully without the United
States—but also without the combined economic presence the
TPP would have had in the Pacific had President Trump not
withdrawn.

A potential list of matters for negotiation is not difficult to
compile:

Chinese accession to the WTO Government Procurement Agreement,
promised by China long ago when it became a member of the WTO

negotiation of a bilateral investment agreement between the
United States and China, which could become a template for new
multilateral rules

the United States’ return to the TPP, coupled with an
invitation to China to join as well

negotiation of new disciplines on subsidies for state-owned
enterprises, building on the innovations in the TPP that were
negotiated by former president Obama and then abruptly abandoned by
President Trump

negotiation of disciplines on forced localization of servers
and other aspects of digital trade and digital trade in
services

negotiations on the vast array of trade in services in which
the United States has a huge economic stake and a comparative
advantage but limited market access in China, perhaps by rebooting
the negotiations on services trade in Geneva in which the Trump
administration has shown scant interest

negotiations on stricter enforcement of intellectual property
rights and on more explicit disciplinary measures on the transfer
of technology and the sharing of trade secrets.

But there can be no negotiations if there is not first a
willingness to negotiate. And, for all his talk of trade deals,
President Trump has shown little interest in the give-and-take of
actual international trade negotiations. Instead, he seems to be
interested only in the take-it-or-leave-it of his personal version
of “the art of the deal.” With some smaller countries,
this may seem to him and his supporters to work. But this approach
will not work for long. It will not work with all countries. And
take-it-or-leave-it most certainly will not work with China, which
has at least as much leverage over the fate of the American economy
as the United States has over that of the Chinese economy. In
truth, the fate of the two economies is in many ways one and the
same, for the two are interdependent—a powerful reason for
both the United States and China to choose to negotiate more and
better rules on which they and all other WTO Members can agree.

Conclusion

The Trump administration may be skeptical about the value of
filing WTO complaints against China, preferring the immediacy and
contentiousness of unilateral tariffs. But if they are looking for
effective approaches to addressing Chinese protectionism and other
trade practices, WTO disputes are the better avenue. China has
responded to U.S. tariffs with its own tariffs, rather than with
market opening. By contrast, China has responded to previous WTO
complaints with market opening. The WTO dispute process is not
perfect, but it is a tried-and-true approach to this problem. Its
biggest flaw is that it is underutilized. The Trump administration
should work with U.S. allies to use the WTO dispute process to
press China to fulfill its promises and become more
market-oriented.

Appendix 1: China’s Response to WTO Complaints Filed
against It

Litigated cases

(12 matters / 19 complaints)

Resolved/abandoned cases

(10 matters / 15 complaints)

Recent pending cases

(5 matters / 7 complaints)

Source: Office of the U.S. Trade Representative,
the European Commission, and China’s Ministry of Commerce
press releases; WTO website; and authors’ correspondence with
government officials.
Note: The agreements under which complaints have been brought are:
General Agreement on Tariffs and Trade (GATT); General Agreement on
Trade in Services (GATS); Agreement on Subsidies and Countervailing
Measures (SCM); Understanding on Rules and Procedures Governing the
Settlement of Disputes (DSU); Agreement on Trade-Related Investment
Measures (TRIMs); Agreement on Trade-Related Aspects of
Intellectual Property Rights (TRIPS); Agreement on Implementation
of Article VI of the General Agreement on Tariffs and Trade 1994
(AD); Agreement on Agriculture (Agriculture); Agreement
Establishing the World Trade Organization (WTO); China’s
Accession Protocol (Accession Protocol).

Appendix 2: Elaboration of Possible WTO Complaints against
China

General Intellectual Property Enforcement

The WTO obligations in the Agreement on the Trade-Related
Aspects of Intellectual Property Rights—the so-called TRIPS
Agreement—are unique among WTO rules.30
Most WTO rules are “don’ts” imposing negative
obligations. Don’t discriminate. Don’t apply tariffs
higher than you promised. In contrast, the WTO rules on
intellectual property rights are “do’s” imposing
affirmative obligations. Do respect intellectual property rights.
Do enforce them. Yet this affirmative aspect of WTO intellectual
property rules has been largely unexplored in WTO dispute
settlement. In particular, and despite widespread intellectual
property violations in many other parts of the world in addition to
China, no WTO Member has yet to challenge another Member with a
systemic failure to enforce intellectual property rights.

Part III of the TRIPS Agreement is titled “Enforcement of
Intellectual Property Rights.”31
Part III, comprising Articles 41 through 61, clearly consists of
affirmative obligations. Section 1 of Part IV relates to
“General Obligations” and consists of Article 41.
Article 41.1 provides:

Members shall ensure that enforcement procedures as specified in
this Part are available under their law so as to permit effective
action against any act of infringement of intellectual property
rights covered by this Agreement, including expeditious remedies to
prevent infringements and remedies which constitute a deterrent to
further infringements. These procedures shall be applied in such a
manner as to avoid the creation of barriers to legitimate trade and
to provide for safeguards against their abuse.32

This “shall” be done by all WTO Members; it is
mandatory for compliance with their WTO obligations. But what does
this obligation mean by requiring that effective actions against
infringements must be “available”? Is this obligation
fulfilled by having sound laws on the books, as is generally the
case with China? Or must those laws also be enforced effectively in
practice, which is often not the case with China? Precisely how
demanding is this obligation in requiring real enforcement of
intellectual property rights?

The Appellate Body has already been more than suggestive of the
answer to this question. The WTO jurists have said that
“making something available means making it
‘obtainable,’ putting it ‘within one’s
reach’ and ‘at one’s disposal’ in a way
that has sufficient form or efficacy.”33
Thus, simply having a law on the books is not enough. That law must
have real force in the real world of commerce. This ruling by the
Appellate Body related to the use of the word
“available” in Article 42 and to a legal claim seeking
fair and equitable access to civil judicial procedures under
Section 2 of Part IV, which relates to “Civil and
Administrative Procedures and Remedies.” The same reasoning
would apply equally to the enforcement of substantive rights under
the “General Obligations” in Article 41 in Section 1 of
Part IV of the TRIPS Agreement.

In the past, the United States has challenged successfully
certain parts of the overall Chinese legal system for intellectual
property protection in WTO dispute settlement.34
Despite its overall concerns about enforcement by China of U.S.
intellectual property rights, the United States has not challenged
the Chinese system as a whole in the WTO on the basis of a failure
to fulfill the specific enforcement obligations in Part III of the
TRIPS Agreement. Instead of resorting to the illegality of
unilateral tariffs and other arbitrary sanctions outside the legal
framework of the WTO, the Trump administration should initiate a
comprehensive legal challenge in the WTO, not merely to bits and
pieces of particular Chinese IP enforcement, but rather to the
entirety of the Chinese IP enforcement system as a whole.

Such a systemic challenge would put the WTO dispute settlement
system to a test, to be sure. It would, what’s more, put both
China and the United States to the test of their commitment to the
WTO and especially to a rules-based world trading system. A
systemic IP case against China in the WTO would involve a perhaps
unprecedented amount of fact gathering. It would necessitate an
outpouring of voluminous legal pleadings. It would, furthermore,
force the WTO Members and WTO jurists to face some fundamental
questions about the rules-based trading system. Yet it could also
provide the basis for fashioning a legal remedy that would in the
end be acceptable to both countries and could therefore help reduce
a significant obstacle to mutually beneficial U.S.-China
relations.

China has denied the allegations by the United States of
systemic Chinese violations of U.S. intellectual property rights,
saying, “We want to emphasize that the Chinese government has
always set a great store by [intellectual property] protection and
made achievements that are for all to see.”35
There have in fact been some improvements in some respects in IP
protection since China joined the WTO in 2001. Yet widespread
infringements continue and, in some of the innovative industrial
sectors targeted by China strategically, seem to be increasing.
China cannot expect the United States and other WTO Members to
continue to respect all their trade obligations to China if China
does not respect all its trade obligations to the United States and
other Members of the WTO.

As it grows economically, China is growing as a force in world
trade and thus in the WTO. China values its membership in the WTO,
in part because China is aware of the considerable benefits it
derives from membership. Professing its ongoing commitment to the
WTO and to international trade based on accepted international
rules, China has also insisted, correctly, that, “any trade
measures that are taken by WTO Members must conform to WTO
rules.”36 But this admonition applies not
only to measures taken in retaliation against perceived trade
violations; it applies also to the measures that are taken that
give rise to those retaliatory measures.

Trade Secrets

A more specific obligation related to intellectual property is
that American companies have, in effect, been forced to turn over
their technology to Chinese partners—in some cases by
revealing their trade secrets—in exchange for being allowed
to do business in China and have access to the booming Chinese
market.

Evidently ignored so far by the United States is Article 39 of
the TRIPS Agreement, which establishes a WTO obligation for the
“Protection of Undisclosed Information.”37
The United States was among the leaders in advocating the inclusion
of Article 39 in the TRIPS Agreement, but the United States has, to
date, not initiated an action in WTO dispute settlement claiming a
violation by China of this WTO obligation.

Article 39 is a major innovation in intellectual property
protection under international law. It is “the first
multilateral acknowledgement of the essential role that trade
secrets play in industry”38
and “the first multilateral agreement to explicitly require
member countries to provide protection for … ‘trade
secrets.’”39 One commentator on the Uruguay
Round of multilateral trade negotiations that concluded the WTO
treaty observed, “The inclusion of trade secrets under the
TRIPS has been hailed as a major innovation.”40

Before the enactment of the TRIPS Agreement, “the
protection of trade secrets was not considered part of intellectual
property protection, but rather of generic unfair competition
rules.”41 With the adoption of the TRIPS
Agreement, “undisclosed information” was for the first
time listed among the different forms of intellectual property in a
global agreement. It is among the intellectual property rights that
must be enforced under Part III of the TRIPS
Agreement.42 Yet, a quarter century later,
Article 39 has never been used. There is no WTO jurisprudence
whatsoever on Article 39.

This is not because Article 39 does not provide protection. On
the contrary, Article 39 specifies that “Members shall
protect undisclosed information… .”43
This is a mandatory obligation for every WTO Member.
“Undisclosed information” is not defined in so many
words in Article 39; however, the circumstances in which
information lawfully under the control of a private party can be
protected against disclosure, acquisition, or use without its
consent are spelled out in detail in the obligation. Information is
protected under Article 39 if it is secret, has commercial value,
and has been protected against disclosure.44

Under Article 39.2, information is secret if “it is not,
as a body or in precise configuration and assembly of its
components, generally known among or readily accessible to persons
within the circles that normally deal with the kind of information
in question.”45 This is capacious language that
provides coverage for virtually all kinds of trade secrets
occurring in modern global commerce. The secret—that is,
“undisclosed”—information must have commercial
value “because it is secret.”46
Thus, there must be a commercial value in keeping it secret. This,
too, is language for the purpose of protecting contemporary trade
secrets.

This requirement that the undisclosed information must have been
protected against disclosure means that it “has been
subjected to reasonable steps under the circumstances, by the
person lawfully in control of the information, to keep it
secret.”47 Article 39 gives no examples of
what such “reasonable steps” might be, and there is no
WTO case law to offer any guidance. This said, “the law can
only protect secrets if they are protected by their
holder.”48 Generally, under national legal
systems that provide for protection of trade secrets,
“secrets must … be kept within a company: only those
persons that need to know the information in order to make use of
it for the benefit of the company may have access to it; others are
excluded.”49 Furthermore, “the higher
the value of the secret is, the more sophisticated and costly the
expected protection by its holder should be.”50Steps taken accordingly would
seem to be among the “reasonable steps” for the
purposes of Article 39.

Under Article 39, disclosure, acquisition, or use of undisclosed
information without consent is prohibited only if it is done
“in a manner contrary to honest commercial
practices.”51 Footnote 10 to Article 39
states, “For the purpose of this provision, ‘a manner
contrary to honest commercial practices’ shall mean at least
practices such as breach of contract, breach of confidence and
inducement to breach, and includes the acquisition of undisclosed
information by third parties who knew, or were grossly negligent in
failing to know, that such practices were involved in the
acquisition.”52 Importantly, the inclusion of
the phrase “at least” in this TRIPS footnote indicates
that the practices specified in the footnote are not the only
practices that may be “contrary to honest commercial
practices.” Here, too, there is a broad scope for protection
in Article 39.

Article 39 provides that the protection of undisclosed
information by WTO Members is to be “in the course of
ensuring effective competition as provided in Article 10bis of the
Paris Convention (1967),” which is referenced in the TRIPS
Agreement.53 Under Article 10bis, “Any
act of competition contrary to honest practices in industrial or
commercial matters constitutes an act of unfair
competition,”54 and “the countries of the
(Paris Convention) Union are bound to assure to nationals of such
countries effective protection against unfair
competition.”55

It could be argued—and some developing countries did
indeed argue during the Uruguay Round—that the protections
afforded by Article 10bis are sufficient to protect trade secrets.
However, many countries at the time had neither sufficient laws nor
efficient administrative procedures in place to protect trade
secrets. Nor were trade secrets recognized as intellectual property
in other international law. It was, therefore, “necessary to
single out the trade secrets as property rights, so as to assure
the broadest protection.”56
The inclusion of Article 39 in Part II of the TRIPS Agreement,
relating to “Standards Concerning the Availability, Scope and
Use of Intellectual Property Rights,” makes crystal clear
that undisclosed information within the ambit of Article 39 is an
intellectual property right that must be enforced under Part III of
the TRIPS Agreement, relating to “Enforcement of Intellectual
Property Rights.”

A specific focus of any action by the United States in WTO
dispute settlement related to the failure of China to protect trade
secrets will be the continuing shortcomings of the Anti-Unfair
Competition Law of China (AUCL), which, as the USTR pointed out in
its Special 301 Report for 2018, include “the overly narrow
scope of covered actions and actors, the failure to address
obstacles to injunctive relief, and the need to allow for
evidentiary burden shifting in appropriate circumstances, in
addition to other concerns.”57
As the USTR observes in the 2017 update of the AUCL, “despite
long-term engagement from the United States and
others—including from within China—China chose not to
establish a standalone trade secrets law, and instead continued to
seat important trade secrets provisions in the AUCL, an arrangement
which contributes to definitional, conceptual, and practical
shortcomings relating to trade secrets
protection.”58

Those who would rather apply the broad illegal brush of
unilateral tariffs instead of the sharp legal stiletto of a precise
claim in WTO dispute settlement will protest that Article 39 has
never been tested in a WTO dispute. This is true. Yet similar
protests were heard 10 and 20 years ago against bringing legal
claims in WTO dispute settlement under the Agreement on Technical
Barriers to Trade and the Agreement on the Application of Sanitary
and Phytosanitary Measures, which have both since been proven to be
reliable tools for upholding and enforcing WTO obligations. Not
having been tested is not the same as having been tried and found
wanting. Until proven otherwise, a legal claim of a failure to
protect “undisclosed information” under the novel
obligation in Article 39 of the TRIPS Agreement must be seen as a
potentially positive means to the end of protecting trade
secrets.

It will certainly be said as well that proving a legal claim of
illegal infringement of undisclosed information under Article 39 in
WTO dispute settlement will not be easily accomplished. This also
is true. As the complainant, the United States will have the burden
of proving this and all its legal claims against China in a WTO
dispute. First of all, in challenging the enforcement of the
Chinese law, the United States, with respect to each alleged
infringement of a trade secret, will have to show to the
satisfaction of a WTO panel that there is in fact
“undisclosed information” that composes a trade secret.
Moreover, the United States will have to prove each particular
instance of the illegal infringement of specific trade secrets.

All of this will necessarily involve the accumulation and
submission of a veritable mountain of evidence—not easy in
any case and certainly not easy in a case against a WTO Member with
such an opaque and elusive economic and administrative system.
Knowing this, the EU nevertheless recently filed a request for
consultations with China in the WTO on China’s regulations on
the import and export of technologies that includes a TRIPS Article
39 claim.59 In contrast, thus far, the
United States has not invoked Article 39. Without question, China
presents a formidable climb in the fact gathering for winning a WTO
case. But the United States has climbed this mountain successfully
before in a series of complicated WTO complaints it has brought
against China and won. Why does the Trump administration seem to
have so little confidence that the world-class legal advocates at
the USTR can climb it again?

Forced Technology Transfer

There have been long-standing, though somewhat vague,
allegations from U.S. industry groups that China forces foreign
companies that wish to operate in China to make investments through
joint ventures, and to then transfer their technology to their
Chinese partners. Specific details on these arrangements are
difficult to uncover. The companies involved may be reluctant to
complain because they fear having their investment permission
revoked by the Chinese government. All the same, in response to the
USTR’s request for comments under Section 301 regarding
China’s trade practices, a wide range of organizations have
identified forced technology transfer as a concern.

As an example, the law firm of Stewart & Stewart has
explained, “Technology transfer requirements are routinely
included in joint venture contracts between foreign investors and
domestic firms, especially state-owned firms, in China’s
automotive sector.”60
In this regard, it noted, “BMW Holdings of the Netherlands
agreed to license certain technology and operational know-how to a
joint venture it formed with state-owned Shenyang JinBei Automotive
Industry Holdings Co., Ltd. (now known as Brilliance) to produce
automobiles in China.”61

In considering a possible WTO legal complaint, the specific role
of the government here is crucial. Which Chinese government
agencies or entities were involved, and how exactly did they
pressure the foreign company to agree to transfer technology? These
kinds of details will be crucial for a successful complaint. The
Chinese actions seem to violate the spirit of WTO rules, but do
they violate the letter of the law as well? There are at least two
good legal avenues for a WTO complaint.

First, China is bound not only by the WTO obligations that bind
all other WTO Members, but also by special rules to which it agreed
as part of its accession agreement when it joined the WTO. These
rules are contained in China’s Accession Protocol and Working
Party Report, and are commonly described as “WTO-plus”
obligations.

As part of these extra obligations that apply solely to China,
Section 7(3) of
China’s Accession Protocol includes an
explicit reference to conditioning investment approval on
technology transfer:

Without prejudice to the relevant provisions of this Protocol,
China shall ensure that … any other means of approval for …
investment by national
and sub-national authorities, is not conditioned on: whether
competing domestic suppliers of such products exist; or performance
requirements of any kind, such as local content, offsets, the
transfer of technology, export performance or the conduct of
research and development in China.62

This undertaking is further elaborated in Paragraph 203 of the
Working Party Report, which was incorporated into the Protocol:

The allocation, permission or rights for … investment would
not be conditional upon performance requirements set by national or
sub-national authorities, or subject to secondary conditions
covering, for example, the conduct of research, the provision of
offsets or other forms of industrial compensation including
specified types or volumes of business opportunities, the use of
local inputs or the transfer of technology. Permission to invest .
. . would be granted without regard to the existence of competing
Chinese domestic suppliers. Consistent with its obligations under
the WTO Agreement and the Draft Protocol, the freedom of contract
of enterprises would be respected by China.63

Pursuant to these provisions, then, national and subnational
Chinese government entities may not condition approval for
investments on technology transfer. Section 7(3) makes clear that
China “shall ensure” that “approval for …
investment” is “not conditioned on … the transfer
of technology.” Paragraph 203 reiterates this language.

If a complainant can prove that this is happening, the complaint
is likely to succeed. The complainant, however, has the burden of
proof in WTO dispute settlement. Thus, the task of a complainant is
to present sufficient facts to a WTO panel to document the actions
of Chinese authorities in conditioning investment approval on
technology transfer.

Beyond these specific WTO-plus commitments, there is also a
general provision that could apply. As described above, the
transparency obligations of GATT Article X include a related
provision that requires appropriate administration of a
Member’s laws. GATT Article X:3(a) provides, “Each
(Member) shall administer in a uniform, impartial and reasonable
manner all its laws, regulations, decisions and rulings of the kind
described in paragraph 1 of this Article.” Under this
provision, a successful claim would need to show that China’s
actions constitute the “administration” of particular
laws, regulations, etc. Then, the claim would need to persuade a
panel that the administration of the laws, regulations, and the
like has been done in a manner that is not “uniform,
impartial and reasonable.” All three requirements could be
the basis for a claim, although “impartial” and
“reasonable” would perhaps be the easiest to
satisfy.

Recently, both the United States and the EU filed requests for
consultations with regard to certain Chinese measures on
intellectual property protection. For its part, the United States
did not challenge any measures directly related to forced
technology transfer. Rather, it focused on licensing contracts
related to intellectual property and how they discriminate against
foreign patent holders and fail to provide adequate protection in
accordance with the TRIPS Agreement.64
While the provisions cited here do result in technology transfer
against companies’ will, the specific action of forced
technology transfer in the process of joint ventures is not
referred to in the complaint. Along the same lines, but slightly
different, the EU, in its request, included a challenge to
China’s application of its laws designed to “induc[e]
the transfer of foreign technology to China,” which it
alleged was in violation of China’s obligation to provide
“impartial and reasonable application and administration of
its laws” under GATT Article X:3(a) and Paragraph 2(A)2 of
the Accession Protocol.65
However, the EU did not invoke Section 7(3), even though it appears
to be the provision that covers this issue most directly.

Subsidies

One of the most frequently raised concerns about Chinese trade
practices is the Chinese government’s provision of subsidies
to both state-owned enterprises and private companies. These
subsidies are offered through a variety of programs, including the
Made in China 2025 initiative and its specific implementing
measures. Fortunately, the WTO has extensive and detailed rules on
subsidies that can be used to challenge China’s behavior. WTO
Members have brought several complaints against Chinese subsidies
already, including an ongoing case related to agriculture subsidies
(see Appendix 1), and there are additional complaints still to be
brought.

The WTO Agreement on Subsidies and Countervailing Measures (SCM
Agreement) deems subsidies to exist when there is a government
“financial contribution” (or income/price support) that
confers a “benefit.” But simply finding that a subsidy
exists is not enough, as not all subsidies violate WTO rules. In
terms of the legal obligations, there are two main categories of
subsidies in the SCM Agreement: prohibited and actionable.

The “prohibited” category applies to certain
particularly trade-distorting subsidies where the subsidies are
“contingent” upon either export performance (export
subsidies) or the use of domestic over imported goods (domestic
content subsidies). These rules are very strict. If a subsidy meets
the terms of either of these, it violates the rules without any
need to show an effect on the foreign competitor, and there is a
shorter time frame for the offending government to come into
compliance when it is found to be providing these subsidies. Thus,
for a program such as Made in China 2025, to the extent that any of
the subsidies are contingent upon export performance or the use of
domestic content, they are in violation of WTO obligations.

Importantly, a de facto connection between the subsidy and
export or domestic content will be sufficient. To take an example,
there have been reports that China is using subsidies to give an
advantage to domestic makers of batteries that are being used in
electric vehicles. According to an article in the Wall Street
Journal: “Foreign batteries
aren’t banned in China, but auto makers must use ones from a
government-approved list to qualify for generous [electronic
vehicle] subsidies. The Ministry of Industry and Information
Technology’s list includes 57 manufacturers, all of them
Chinese.”66

For those unfamiliar with WTO rules, this situation may seem too
complex to confront. However, the SCM Agreement rules are designed
to deal with just this kind of subtle, disguised protectionism.
Domestic content subsidies are prohibited even where the
contingency is not specified in law.67
If a complainant can show that the connection between the subsidies
and the use of domestic goods exists on a de facto basis, the
measure will be found in violation. Whether a challenge succeeds
will depend on the specific facts of the case. In the electric
vehicles example described above, the complainant could look for,
inter alia, evidence that the electric vehicle companies that have
received subsidies only use batteries on the government lists or
that they switched to using the batteries on the lists after the
lists were published.

The second category is “actionable” subsidies, which
require a showing of an “adverse effect” on a foreign
competitor. Under Article 5 of the SCM Agreement, adverse effects
may arise through the use of a subsidy when that subsidy results
in:

injury to the domestic industry of another Member

nullification or impairment of benefits accruing directly or
indirectly to other Members under GATT 1994, in particular the
benefits of concessions bound under Article II of GATT 1994

The “injury” in subparagraph (a) is the same type of
injury that is the basis for countervailing duty determinations, as
made clear in a footnote to that provision. The “serious
prejudice” in subparagraph (c) is defined further in Article
6.3, which identifies the following examples, inter alia, of
serious prejudice: displacement or impedance of imports in the
market of the subsidizing country or a third-country market; and
significant price undercutting or significant price suppression,
price depression, or lost sales in the same market. Both of these
provisions can provide the basis for claims against subsidies, but
they can be challenging to prove, requiring specific evidence of
how a particular market has been affected by subsidies. Meeting the
burden of proving such claims is especially challenging with
respect to China, but past experience shows it can be done.

In addition, subparagraph (b) sets out a potentially broad, but
mostly unexplored, type of actionable subsidy claim. There has been
a long-standing GATT/WTO remedy for “nullification or
impairment” that occurs even in the absence of a violation,
generally referred to as a “non-violation” claim. These
claims have a higher burden of proof, which makes them difficult to
win, and they also have a weaker remedy, which makes winning them
less valuable.69 However, by incorporating the
nullification or impairment language into SCM Agreement Article
5(b), the WTO drafters may have given this remedy more teeth. There
is little existing precedent for such claims, but the language is
broad enough to make it worth exploring creative complaints under
it.

As an example, China recently introduced tax exemptions and tax
reductions for Chinese semiconductor producers, to last for a
period of 10 years. For the first two to five years, the taxes will
be eliminated completely.70
Subsequently, the taxes will be cut in half, through the 10th
year.71

These tax exemptions and reductions clearly constitute
“specific subsidies” under Articles 1 and 2 of the SCM
Agreement, since they target a particular Chinese industry. The
more difficult question is whether they cause “adverse
effects to the interest of other Members” under Article 5.
There is an argument that, because of their substantial size and
the overall design of China’s policies in this sector, the
tax exemptions and reductions given by China to its semiconductor
industry cause adverse effects under Article 5(b).

According to footnote 12 to Article 5(b), nullification or
impairment is “used in this Agreement in the same sense as it
is used in the relevant provisions of GATT 1994, and the existence
of such nullification or impairment shall be established in
accordance with the practice of application of these
provisions.” Where a measure is inconsistent with a provision
of the GATT, Article XXIII:1(a) applies, and nullification or
impairment is presumed. In addition, however, Article XXIII:1(b)
gives rise to a cause of action when a member, through the
application of a measure, has “nullified or impaired”
“benefits” accruing to another Member, “whether
or not that measure conflicts with the provisions” of the
GATT 1994 (so-called non-violation complaints). The concept of
nullification or impairment as an independent basis for a claim,
even where there is no violation, has been elaborated in only a few
GATT/WTO disputes. One panel offered detailed explanations, and the
Appellate Body discussed the issues briefly, which can be
summarized as follows.

The text of Article XXIII:1(b) establishes three elements that a
complaining party must demonstrate in order to make out a claim
under Article XXIII:1(b): (1) application of a measure; (2) a
benefit accruing under the relevant agreement; and (3)
nullification or impairment of the benefit as the result of the
application of the measure.72

In the case of the Chinese tax exemptions and reductions, the
application of the measure is clear and the benefits accrue on the
basis of the tariff concessions made by China as part of its
accession and through further commitments made under the recent
Information Technology Agreement (ITA) expansion with regard to
semiconductor products.73

The issue here is whether the semiconductor tax exemptions and
reductions nullify or impair the benefits of China’s tariff
concessions. There is a strong argument that this is the case, due
to the fact that the competitive relationship between Chinese
chipmakers and U.S. chipmakers has been upset by a very substantial
subsidy.

Importantly, in order to prove an Article 5(b) adverse effects
claim, there is no need to show lost sales. In this regard, the
GATT EEC-Oilseeds I panel concluded: “In the
framework of GATT, contracting parties seek tariff concessions…
. The commitments they exchange in such negotiations are
commitments on conditions of competition for trade, not on volumes
of trade.”74 Instead of an effect on the
volume of trade, a claim of “nullification or
impairment” is based on “upsetting the competitive
relationship” between domestic and imported
products.75 Thus, in the present case, even
though the immediate effects of the subsidy on trade flows between
the United States and China are not known, the United States may
still argue that its producers have been put at a competitive
disadvantage relative to their Chinese competitors.

In this case, the benefits in question accrued to the United
States on the date of China’s original tariff schedule taking
effect after accession, and the date of the ITA expansion being
incorporated into China’s schedule. The subsidy (i.e., the
tax exemptions and reductions) was announced on March 30, 2018, and
was to be effective from January 1, 2018. Since the tax exemptions
and reductions were announced on a date subsequent to the tariff
concession, the United States is entitled to rely on a presumption
that it did not anticipate the introduction of the subsidy and its
consequent upsetting of the expected competitive relationship
between U.S. and Chinese chipmakers.76

Elaborating on this standard, in EEC-Oilseeds I, a GATT
panel considered that nullification or impairment would arise when
the effect of a tariff concession is “systematically offset
by a subsidy programme”:

The Panel considered that the main value of a tariff concession
is that it provides an assurance of better market access through
improved price competition. Contracting parties negotiate tariff
concessions primarily to obtain that advantage. They must therefore
be assumed to base their tariff negotiations on the expectation
that the price effect of the tariff concessions will not be
systematically offset. If no right of redress were given to them in
such a case they would be reluctant to make tariff concessions and
the General Agreement would no longer be useful as a legal
framework for incorporating the results of trade
negotiations.77

This standard was reiterated by a WTO panel in the
U.S.-Offset Act dispute: “This would suggest,
therefore, that the EEC-Oilseeds panel considered that
non-violation nullification or impairment would arise when the
effect of a tariff concession is systematically offset or
counteracted by a subsidy programme.”78

Examining the semiconductor tax exemptions and reductions under
the standard of “systematic offsetting/counteracting”
makes clear that the measure has caused nullification or
impairment, for the following reasons.

First, the amount of subsidy provided is of great importance.
Here the amount of subsidy is the amount of government revenue
forgone, which is a complete rebate from a corporate income tax of
25 percent, for two to five years, covering a wide swath of
semiconductor manufacturers, plus a 50 percent rebate from income
tax through to the 10th year. This large tax rebate serves to
completely undermine the promise of lower tariffs, which was a
substantial concession that could have been of great benefit to
foreign producers, and indicates that the subsidy is counteracting
the competitive benefit accruing to the United States under
China’s promises.

The U.S. semiconductor industry is the leading global provider
of semiconductors and semiconductor manufacturing equipment,
accounting for 50 percent and 47 percent shares of the world
market, respectively. More than 80 percent of U.S. production is
exported, with China its biggest export market. Moreover,
China’s growing demand for semiconductors is met mainly by
imports, including 56.2 percent from the United
States.79 These trade figures make it
clear that the United States will be hit hard and put at a
competitive disadvantage by these Chinese subsidies relative to
what it enjoyed previously. Any competitive edge that U.S.
chipmakers had because of tariff reductions on their exports to
China will be offset by the Chinese grant of subsidies in the form
of tax breaks to domestic Chinese chipmakers.

Secondly, the systematic nature of the Chinese measures can be
seen through the broader context of the measure. The Chinese
government, motivated by economic and national security goals, has
publicly asserted its desire to build a semiconductor industry that
is far more advanced than today’s and less reliant on the
rest of the world.80 The strategy aims at making
China the world’s leader in Integrated Circuit (IC)
manufacturing by 2030.81 Therefore, the intention of the
Chinese government is clear: it wants to promote domestic
production, either for domestic use or export.

Thirdly, the effect of the tax exemptions on U.S. manufacturers
must be viewed in light of China’s broader strategy. The
stated aim of Chinese policy is for China to be at an
“advanced world-level [semiconductor capability] in all major
segments of the industry by 2030.”82
China has set goals to promote its IC sectors and is supplementing
these specific policies with a series of complementary policies
that are applied across the IC sector. According to public reports,
it places conditions on access to its market to drive localization
and technology transfer.83
All these measures taken together have the potential to (1) force
the creation of market demand for China’s indigenous
semiconductor products; (2) gradually restrict or block market
access for foreign semiconductor products as competing domestic
products emerge; (3) force the transfer of technology; and (4) grow
non-market-based domestic capacity, thereby disrupting the global
semiconductor value chain.

Summing up, while China promised to reduce semiconductor tariffs
as part of its accession and under the ITA, and has therefore made
commitments under Article II benefiting its trading partners,
including the United States, it has nullified or impaired those
benefits through the use of specific subsidies, resulting in
adverse effects under SCM Agreement Article 5(b).

3. Robert Lighthizer,
“U.S. Trade Policy Priorities,” Center for Strategic
and International Studies, September 18, 2017, https://www.csis.org/analysis/us-trade-policy-priorities-robert-lighthizer-united-states-trade-representative.
(“While some problematic policies and practices being pursued
by the Chinese government have been found by WTO panels or the
Appellate Body to run afoul of China’s WTO obligations, many
of the most troubling ones are not directly disciplined by WTO
rules or the additional commitments that China made in its Protocol
of Accession. The reality is that the WTO rules were not formulated
with a state-led economy in mind, and while the extra commitments
that China made in its Protocol of Accession disciplined certain
policies and practices existing in 2001, the Chinese government has
since replaced them with more sophisticated—and still very
troubling—policies and practices.”)

5. U.S. Trade
Representative, “2017 USTR Report on China’s WTO
Compliance,” p. 2. (“[I]t seems clear that the United
States erred in supporting China’s entry into the WTO on
terms that have proven to be ineffective in securing China’s
embrace of an open, market-oriented trade regime.”)

13. U.S. Department of
Commerce, Intellectual Property and the U.S. Economy: 2016
(Washington: USDOC, 2016), ii, iii, 19. These are the most recent
numbers available, from 2014. These numbers have likely increased
with the continued U.S. economic recovery from the Great
Recession.

34. WTO, Panel Report,
China—Measures Affecting the Protection and
Enforcement of Intellectual Property Rights,
WT/DS362/R, March 20, 2009. It should be acknowledged that one of
us, James Bacchus, was WTO counsel to the U.S. entertainment
industry in that dispute, in which the United States prevailed.

53. TRIPS Agreement,
Article 1.3. Per footnote 2 of the TRIPS Agreement, the Paris
Convention (1967) refers to the Stockholm Act of 14 July 1967 of
the Paris Convention for the Protection of Industrial Property of
1883.

James
Bacchus is an adjunct scholar, Simon Lester is
associate director, and Huan Zhu is a research associate at the
Cato Institute’s Herbert A. Stiefel Center for Trade Policy
Studies. Bacchus was a Member of the WTO’s Appellate Body.